There's more to this scandal than has so far become apparent. And as this is the TaxBuzz blog I will focus here on the tax issues. I've identified 15 tax related questions below. I think these are simply a sub set of those that demand answers.
Reference is frequently made to the
Green Book, subtitled "A guide to Members' allowances".
In its opening section it states that "Parliamentary allowances are designed to ensure that Members are reimbursed for
costs properly incurred in the performance of their duties". (My emphasis). The current version was only published in March 2009, following a report in
June 2008 after a full review of the MPs allowances and expenses.
Indeed, the entire first section of the Green Book contains exactly the restrictions and guidance that the media and the public has been saying should apply. I have copied the entire first section onto a
separate page of this blog for ease of reference. I have also included a link there and quoted from the previous 2006 edition of the Green Book.
What we need is for the practical application of the rules to support the worthy aims set out in section 1 of the current
Green Book AND for the tax rules to apply to MPs in the same way as they apply to all other employees and directors.
MPs' tax returns are very similar to those for employees and directors. However instead of the general 'employment' pages they have 'Parliament' pages. These have been specially designed to cover the income and expenses which MPs and Ministers have.
The Parliamentary Dept of Finance and Administration acts as the employer for the income paid to MPs.
So here are my 15 tax questions that have yet to be addressed. If you can think of any more, please add them as comments below this blog post. And equally if you know the answers or can offer reasonable explanations please do so.
1 - Does tax law really contain a blanket exemption for all amounts paid out as allowances?(Section 292 ITEPA only refers to Overnight expenses allowances. Para 2.1 of
The Green Book refers to "personal additional accommodation expenditure (PAAE)" which is 'available to reimburse Members of the additional expenses necessarily incurred in staying away from their main home for the purpose of performing their parliamentary duties'. Later sections describe other allowances that bear no relation to 'overnight expenses').
2 - Does the relevant resolution of the House relate to the principles or the details?(Section 292 ITEPA exempts the 'overnight expenses allowance paid to a Member of the House of Commons in accordance with a resolution of the House'. Did the House agree the principles set out in
section 1 of the Green Book or did it cover the entire contents of the Green Book?)
3 - Were MPs aware that they were voting themselves a more liberal expenses regime than applies to all other employees and directors?(If MPs are to escape tax on generous expense allowances and 'reimbursements' why not all those workers who have to work long hours or who live away from home due to the requirements of their job?)
4 - Who will decide whether HMRC has the power to investigate the extent to which MPs have received reimbursement of expenditure that does not relate to 'additional expenditure necessarily incurred for the purpose of their parliamentary duties?(The 2006 edition of the Green Book contains very clear statements that suggest that the same rules apply to MPs as to other employees and directors. Do we have an equivalent of the often maverick District Attorneys that take on the establishment in US dramas and films?)
5 - What is the correct tax treatment of the sums received by MPs that are now to be repaid?(Tax law normally determines that such payments to employees and directors should be treated as loans and tax paid on the notional interest on this 'borrowed' money)
6 - Why does HMRC's guidance booklet 'MPs, Ministers and tax' refer to 'Additional Costs Allowance (ACA)' as if it were synonymous with the 'overnight expenses allowances' in s292 ITPA 2003?(The phrase 'Additional Costs Allowance' does not appear in the current edition of the `
Green Book' but it is used elsewhere to describe a number of expenses - It is however used in the 2006 edition of the Green Book where it is noted that the ACA is 'sometimes referred to as the Living Away from Home Allowance, Overnight Allowance and Accommodation Allowance' - to confuse or to clarify do you think?).
7 - To what extent do HMRC have the authority (and available man power) to check MPs tax returns have been correctly completed?
(The expenses related section of the HMRC guidance notes that accompany the Parliament pages are explicit. "Expenses that might put you in a position to do your official duties, rather than actually doing them, are not allowable." This accords with the tax rules that apply to all other employees and directors).
8 - To the extent that MPs have been reimbursed expenditure that does not satisfy the principles set out in section 1 of the (March 2009) Green Book, can they be required to pay tax as would other employees and directors receiving money from their employer for personal expenditure?(Such situations commonly arise where directors of small companies, that they own, use company funds to pay for personal expenditure).
9 - How culpable are the 6 MPs on the Members Estimate Committee which last reported on its Review of Allowances in June 2008?(Michael Martin (Chairman), Harriet Harman, Theresa May, Stuart Bell, Nick Harvey and David Malean sat on the Committee which had 4 functions of which one was: to modify [the] provisions from time to time as the committee may think necessary or desirable in the interests of clarity, consistency, accountability and effective administration, and conformity with current circumstances;)
10 - Why were the comparable tax rules not also considered when that Committee considered the six main categories in which Members’ work is supported by the taxpayer?(
The report stated that it's top priority - in June 2008 - was to improve public confidence in the House by better systems of financial assurance! It identified the following categories in which MPs work is supported by the taxpayer: employment of staff; office costs; communicating with constituents and the public; travel; overnight costs; and redundancy).
11 - Why are MP's exempt from having to supply receipts for expenditure under £25 (previously £250) when ALL other employees and directors are not?(Either this rule should apply to taxpayers or else MPs should be subject to the same record keeping obligations as everyone else).
12 - Why was it necessary to add a further £10,000 (now £10,400) 'communications allowance' in 2007/08 on top of the existing Staffing, Additional costs and incidental expenses allowances?(If MPs were treated the same as other employees and directors then such expenses would previously have qualified for tax relief as being unfunded expenses incurred 'wholly, exclusively and necessarily' for the purposes of their job. Were they claiming such relief? If not, why not?)
13 - Are any of the auditors culpable or were their actions constrained by the terms under which they were required to operate?(Para 24 of the
June report notes that claims are not accepted without question and that claims are rejected often because the items claimed for are not allowable. para 25 states that "A process of audit is carried out, both internally by the Internal Audit team (in partnership with PwC) and externally (by the NAO). These audits check on the operation of the internal controls).
14 - How much or little guidance appeared in previous versions of the Green Book?(para 71 of the
June report recommends that the
Green Book be 'Revised to specify more detailed rules and that the new version be brought into effect by 1 April 2009'. It seems likely that the previous version was even more liberal but did it contain the same aspirational standards and restrictions set out in
section one?)
- I have now traced the
2006 edition of the Green Book and there is clearly a big difference in style and content.
15 - When the Prime Minister refers to MPs breaking the rules, does he mean the spirit of the rules or the letter of the guidance?
The Green Book contains precisely the obligations on MPs and restrictions to prevent abuse as one would expect. It then goes onto to permit a wide range of expenses that do not always meet the aspirations of the guidance itself. When the PM talks about sacking MPs who broke the rules, exactly what does he mean? - In this connection I wrote a piece for this blog in February 2008: Is it one rule for MPs and another rule for the rest of us?
In an interesting tax site we get a commentary on MPs' tax liabilities:
Posts
3 comments:
Typo in section 15 header. You have an of where you mean an or.
Otherwise 15 excellent questions.
Once upon a time I worked for a large multi-national travelling several days a week between countries. I moved abroad with them. My recollection was that my UK home mortgage was paid less the rental income I received. MPs would obviously do something different.
I do remember a manager having their children's swimming lessons paid for because the country in question had a large number of communal moats. That was about as far as you could go.
Thanks Andrew. Typo duly corrected.
A letter in my local paper has suggested that the MPs allowances should be means tested like the pension credit, or tax credits. This way only MPs who really need the extra money would receive an allowance.
Tax zone
Feature
MPs, their expenses and tax by Rebecca Benneyworth
The lay press carried stories over the weekend indicating that HMRC were in part to blame for failure to properly scrutinise the tax position of MPs, but last week it seemed clear that the authority had relied on the work done by the Fees Office in checking the expenses to establish that no tax charge applied to the payments made.
Members of AccountingWEB.co.uk tried a little digging of their own to establish the position, but with limited success. So what are the rules, and what tax issues will MP’s have to address, in addition to the other problems arising out of the expenses scandal?
First, the law in regard to expenses for overnight stays away from the MP’s only or main residence is stated in ITEPA 2003, section 292 :
292 Overnight expenses allowances of MPs
(1) No liability to income tax arises in respect of an overnight expenses allowance paid to a member of the House of Commons in accordance with a resolution of that House.
(2) “Overnight expenses allowance” means an allowance expressed to be in respect of additional expenses necessarily incurred by the Member in staying overnight away from the Member’s only or main residence, for the purpose of performing parliamentary duties—
(a) in the London area, as defined in such a resolution, or
(b) in the Member’s constituency.
The first point to note is that the exemption from tax is provided to any expense paid in accordance with a resolution of the House of Commons. There is no qualifier for tax purposes that the expense be laid out wholly, exclusively or necessarily. The only recognisable qualifying condition comes in S292(2), which requires that the allowance is “expressed to be” in respect of additional expenses necessarily incurred by the member…in performing parliamentary duties….
Thus the expense payments are exempt from tax if they are authorised by a resolution of the House and are expressed as payments of amounts necessarily incurred for the performance of parliamentary duties. Note that the test is what the expenses are described as rather than what they are actually in respect of. I wonder if there is a real practical difference here?
Some members will remember the great cases of the 1990’s when appeals were heard against a disallowance of expense claims under what was then Section 198 ICTA 1988 (or indeed S 189 ICTA 1970). My favourite was probably Smith v Abbott, in which it was ruled that journalists were not “in the performance of their duties” when reading competing newspapers – even though their editor (Mr Burden) stated that they were indeed performing the duties of the employment. The House of Lords ruled in 1994 [BTC66] that they were in fact “preparing to perform their duties” but not actually performing them.
This case, and the many others that were heard on the test of “performing duties” would indicate to me that had HMRC indeed been responsible for scrutiny of the expense claims then very few of the more fragrant claims that we have heard of over the last week would have been successful – including claims for dog food, moat clearance, patio heaters, wisteria removal, tennis court repairs - the list is probably almost endless; but have the MPs in reality got a tax problem? My view on this count is no, provided the claims were within the rules set out by the resolution of the House, and are described as set out in Section 292(2) then they are immune.
So what does the “Resolution of the House” authorise? There is plenty of guidance available to explain what MPs should be able to claim for. The introduction to the Green Book (which contains the guidance on expenses, but not the details of the resolutions) states that “parliamentary allowances are designed to ensure that members are reimbursed for costs properly incurred in the performance of their duties.” Once again the reference to the performance of their duties is made. The Green Book goes on to explain the code of conduct on expenses adopted in 1995.
The principles set out in the guidance underpin the allowance regime. Of most specific application to the question of taxation are the following:
“Claims must only be made for expenditure that it was necessary for a member to incur to ensure that he or she could properly perform his or her parliamentary duties.”
Further guidance on applying this principle follows: “Is this expense genuinely incurred by me in my role as a member of parliament as opposed to my personal capacity?
Is this purchase supporting me in carrying out my parliamentary duties? Defining parliamentary duties is difficult but members may wish to consider…the generally accepted parliamentary functions: the legislative role; the oversight and accountability role; and the representative role, including dealing with constituents’ problems …”
In respect of the overnight costs allowance (referred to as PAAE), the principles of the claim are then set out as follows :
Purpose of the allowance
PAAE is available to reimburse members for the additional expenses necessarily incurred in staying overnight away from their main home for the purpose of performing their parliamentary duties. It may only be used to meet the following costs:
So the structure of the allowance meets the requirements of tax law, and if paid in accordance with these principles, the amounts claimed are not subject to tax. What is moot is whether the same standard is applied in determining “necessarily incurred” and “in the performance of parliamentary duties” when scrutinised by the fees office as would be applied by HMRC in considering expenses claimed by employees.
The other area of concern is the exemption awarded for CGT, and how this has been used. While accountants will generally accept the availability of the main residence exemption, and indeed the opportunity to maximise the benefit of the exemption by careful elections by those with more than one home, I would be particularly concerned to check the status of CGT claims alongside the claims to additional costs allowance for the “second home” to ensure that the claims are consistent with each other.
Although the owner is permitted to choose which is regarded as his main home for tax purposes, the basis of claim set out above indicates that the claims are made when “away from the main residence”. It would be interesting to know whether MPs chose to call different homes their “main residence” for tax purposes and expense claim purposes. And what of Hazel Blears? Has she indeed amended her tax return, or has she made a voluntary disclosure to HMRC that her return contained an inaccuracy for the year concerned? If so, would it be appropriate to seek interest (definitely) and penalties (possibly)?
It's a pretty pickle all round. If MPs want to clean up their act, I suspect that a change in the law might be appropriate to ensure that HMRC can retain the right to check the expenses for tax purposes. That way the voter can be assured that the rules are (nearly) the same for everyone.
Number of comments: 15
AccountingWEB.co.uk 18th May 2009
Tuesday, May 12, 2009
It never rains but it pours
Yes, indeed, it is of Lord Tebbit we speak who has just ruffled every single Tory feather. No wonder he had a big smile on his face when I saw him yesterday at the launch of Marta Andreasen's book. He knew trouble was coming and it was coming from him.
Most people know the story. In the wake of the spreading expenses scandal Lord Tebbit has called on people not to vote for any of the main parties in the coming European election. Reasonable enough and, as so often with Tebbo, a sentiment that echoes much of what the electorate feels. Furthermore, he very carefully did not suggest that they should vote for any other party but the general feeling is that he was covertly promoting UKIP, whose officials are purring with delight even as I write this.
Despite that there have been calls for the whip to be withdrawn from Lord Tebbit, as it was withdrawn from Stuart Wheeler, who was also there yesterday and did not seem too upset about no longer having to give large sums of money to the Tories. (We covered that story here and here.)
Jonathan Isaby has called for the man's head ... errm, whip ... and raised quite a storm in the comments section. Tim Montgomerie, the online begetter of ToryBoy blog disagrees and thinks this is a storm in a teacup that should be left to die out.
Most other commentators seem to think Isaby is wrong for various reasons, not least because some understand how throwing Tebbit out of the Conservative Party will play with the electorate. Some think he should be left in the exile he is in, which appears to be on the pages of the Daily Mail. Some exile. Is that not the second most popular daily newspaper in the country?
There is one chap who says this is only Tebbit's effort to drag the European issue into the discussion and thus split the party. It was rightly pointed out by another commenter that we are about to have European elections and, therefore, the European issue might be of some interest.
David Cameron, it would appear, is also threatening to make Lord Tebbit into an Independent. Well, well. Can the man be really that stupid?
The truth is that, no matter what the various posters say on ToryBoy Blog, Cameron's promises to deal with his MPs may sound good but who is actually going to believe them? Tebbit has left the party in something of a quandary.
Cameron's instinct, one assumes, is to throw the man out, not least because he reminds people of what the Conservative Party once was. But that very fact makes the action quite difficult. Just a few days ago the entire Conservative Party, many rather nauseatingly and hypocritically, was celebrating the thirtieth anniversary of the first Thatcher victory with more than a few drooling comments on how it will be just the same next year. (Cameron as the new Thatcher? I think not.)
How will it play now if Thatcher's closest lieutenant, the man who resolutely has resolutely fought and still fights all enemies of true conservatism, who suffered shockingly in the Brighton bomb, is thrown out of the party because he dares to point out that politicians who were caught with their hands in the till (entirely within the rules, naturellement) should not receive the electorate's approval.
How will it play if Cameron is seen to be tougher with the man who points to the wrong-doing and points out that in a democracy the electorate can deal with these matters than with the wrong-doers themselves? Will that bring in the Conservative vote? Again, I think not. No wonder UKIP is purring.
Then there is another aspect that we referred to when the Wheeler saga unfolded. After all, Ken Clarke once opposed a core Conservative policy on the referendum and sided with the Labour government. Did he lose the whip? There was the unfortunate episode of Patrick Mercer and John Bercow joining Gordon Brown's big tent circus though Mr Mercer realized after 33 days that he had been had. Did they lose the whip? No sirreee. Siding with the main opponent, the Labour Party is no longer a cardinal sin in the Conservative Party but even the slightest hint that UKIP should be the choice in the European elections is.
What other evidence would the electorate need for the fact that there is no difference between the main parties. There is just us and them.
http://eureferendum.blogspot.com/
"MPs have set their own moral compass and Nadine must face up to the realities of openness and transparency."
One Labour MP, Stephen Pound, warned that MPs could not expect public sympathy and dismissed her comparison of the current situation with the anti-communist witch-hunts of US senator Joseph McCarthy in the 1950s as "facile".
"McCarthy's victims were innocent and no MP is innocent. Even people who didn't claim were still complicit in the situation.
"The idea that anybody is going to play the violin and ask people to contribute to the MPs' relief fund has absolutely no grasp of reality whatsoever," he said.